In order to increase the supply of housing in Nigeria, we need to equally increase demand. The biggest factor in increasing the demand for housing is through the availability of funds to the buyer. The average length of mortgage globally is 25 years, however in Nigeria, many people have to save up to buy their houses through full cash down payments…
The housing deficit in Nigeria has been a recurring conversation in the past couple of years. According to a recent report by PriceWaterhouseCoopers (PwC), there is a present deficit of over 17 million houses in Nigeria, and this requires about 700,000 new houses to be built yearly, compared to the less than 100,000 houses that are being constructed yearly. So, why is Nigeria not able to build more houses than the current number?
Over the past few years, governments in the country have been attempting to crack the deficit question, but with little success, if any at all. The housing deficit, like many deficits we have in Nigeria, is a question of economics (the efficient allocation of resources) rather than technical know-how. This deficit has been misdiagnosed as a cost, rather than an affordability problem, and there are deep beliefs that houses in Nigeria are expensive, hence the plans and attempts to develop low-cost housing. The current minister of Works and Housing, Babatunde Raji Fashola (SAN) once said that there is no low-cost building material, as such it is difficult to have low-cost housing in Nigeria. However, low cost housing could be achievable through design and scale. An important point to also state is that we cannot provide house ownership to the poor, but we need to reduce the number of the poor.
The government has been overly laying much effort on the cost or price of the building of houses and thus trying to force an economic logic on this. Yet, it is basic economics that prices are determined at the intersection of demand and supply. Prices are not going to be efficient when we have low demand for, as well as a low supply of housing. The question then is: What are the factors determining the low demand for, and the low supply of housing? How do we address this?
Nigeria has a relatively cheap housing market (not the extreme examples in very high brow Lagos), however the problem affecting the sector is often the demand for cash payments for properties, which is coupled with the exorbitant interest rates that come with these payments.
In order to increase the supply of housing in Nigeria, we need to equally increase demand. The biggest factor in increasing the demand for housing is through the availability of funds to the buyer. The average length of mortgage globally is 25 years, however in Nigeria, many people have to save up to buy their houses through full cash down payments, or with the help of short-term lenders within a maximum of two years. These practices significantly make it difficult to have an increased number of people demand for houses.
Nigeria has a relatively cheap housing market (not the extreme examples in very high brow Lagos), however the problem affecting the sector is often the demand for cash payments for properties, which is coupled with the exorbitant interest rates that come with these payments. A three-bedroom flat in a multi-dwelling unit (MDU) in the commercial capital of Nigeria, which is Lagos, goes for between N25 million and N30 million (which is actually less than $80,000, at the exchange rate of N380/$1). This would be a bargain acquisition in many economic capitals of the world. A single built three to four bedroom bungalow in other state capitals would go for less than half the rate in Lagos (with the obvious exception of Port Harcourt, Abuja, and maybe Owerri).
This clearly shows that the problem of the Nigerian housing deficit is more around affordability rather than cost. The government established the Federal Mortgage Bank of Nigeria (FMBN) through the National Housing Fund to help with this, but after years of underperformance, it is obvious that the institution does not work as it should. Seven years ago, the Nigeria Mortgage Refinance Company (NMRC) was set up to equally address the deficit, and to date it has been difficult to gauge its success. The truth is that we need more cash flow into housing development in Nigeria; a lot of the sleeping and dead capital in the country should be woken and invested in housing. These investments would be secure as the houses would be the collateral for such investments. Since the rates on government securities have been rightly crashed, this should encourage the investment in other instruments and asset classes.
If more mortgage facilities, with an average of 20 to 25 year tenures at the rate of 6 per cent per annum become available, the demand for housing in the country would increase significantly. The increase in demand would lead to increased funds for the real estate sector and, as such, developers would start to build more houses.
The Pension Fund could be an important source of financing for the development of housing in Nigeria, and with this being a long-term fund, its investment in real estate should be a logical choice. Over the years, there have been reduced options for pension fund administrators (PFAs) on where and how they can invest their funds, and many had rightly ploughed these in government securities, which yielded double-digit returns for a signifcant stretch of time. However, with the recent government policy that has led to the reduction of these returns, the PFAs are on the lookout for other options. Presently, the pension assets in the country is over N10.3 trillion, and thus it is time for PFAs to look at real estate. We can imagine if 10 per cent (N1 trillion) of these pension assets is available for real estate investment through mortgages what the returns would be. In the past few months, returns from Money Market Mutual Funds have been hovering at between 2 per cent and 4 per cent per annum (which would hopefully remain so), and this makes the 6 per cent that the government is encouraging for mortgages to be attractive.
If more mortgage facilities, with an average of 20 to 25 year tenures at the rate of 6 per cent per annum become available, the demand for housing in the country would increase significantly. The increase in demand would lead to increased funds for the real estate sector and, as such, developers would start to build more houses. As a result, mortgage companies would grow bigger possibly from the acquisition of stakes in them by big PFAs, and consequently, mortgage companies would be able to employ more professionals. Consequently, the insurance industry would gain too, as all houses under mortgage would be insured. The building of more housing units would equally lead to the significant increase in the construction sector of the economy, thereby improving the national GDP. The financial services sector would also improve as the mortgage service is a financial service. The manufacturing and transport sector of the economy would not be left out of the economic growth that will be experienced.
What would this cost government? Almost nothing, except for a review of its policies related to housing and also accepting the obvious fact that it cannot solve the many socio-economic problems in Nigeria alone, without involving the people and the funds at their disposal. In the end, everyone wins, and the economy becomes larger, grows, and attains more robustness.
Olamide Eyinla shares his thoughts from Lagos.
